Foreign Economic Aid

Key Points

The United States provides nearly $10 billion a year in economic assistance, mostly in grants.

During the cold war, U.S. foreign aid focused on support to anticommunist countries, economic development in poor countries, and humanitarian relief.

U.S. foreign economic assistance has shifted its purposes, its organizational structure is in question, and the way it operates is being challenged.

U.S. foreign economic assistance, primarily bilateral aid via the U.S. Agency for International Development (USAID), is in a period of transition. Its purposes are shifting, its organizational structure within the U.S. government is in question, and the way it operates is being challenged. These changes are not the result of a national discussion and debate or of planning on the part of government officials. Rather, they are ad hoc responses to changes both in the world and in the domestic political environment of the United States. If foreign aid is to make a contribution both to U.S. interests and values in the 21st century and to the well-being of others, it is time for a national discussion to decide future directions.

The United States currently provides nearly $10 billion in foreign economic assistance annually. These concessional resources (mostly grants) are provided to foreign governments, to nongovernmental organizations (NGOs) for work abroad, to international organizations like the UN Development Program, and to the multilateral development banks like the World Bank and the Inter-American Development Bank.

U.S. foreign aid had its origin in the immediate post-World War II period. It began with assistance to Greece and Turkey and with the Marshall Plan. Its intent was to contain the spread of communism in Europe and to help European countries recover from the destruction of the war. Following the revolution in China and the war in Korea, U.S. aid began to be provided to countries in Asia. Later, aid was offered to Latin American countries, especially through the Alliance for Progress, inaugurated in 1961, and to the newly independent African countries.

As U.S. aid spread beyond Europe, a second major purpose was added—to help promote economic development in poor countries. A third purpose, long present in U.S. foreign aid, has been to provide humanitarian relief to those suffering from natural or man-made disasters. These three purposes—promoting U.S. security by resisting communism, supporting development, and providing humanitarian relief—were used to justify foreign aid to Congress and the American public for most of the second half of the 20th century. They also interacted to determine how much aid was allotted to individual countries or international organizations and how the aid was spent.

However, with the fall of the Soviet Union in 1991, one major rationale for U.S. foreign aid disappeared. At the same time, several factors coincided to weaken the second major rationale—that is, of promoting development abroad. One factor was the considerable economic progress achieved over several decades in many poor countries of Asia and Latin America, reflected in rising rates of literacy, longer life expectancy, and, in a number of countries, higher per capita incomes. (In contrast, most of Sub-Saharan Africa remained poor, and by 1990, a number of countries were poorer in per capita income than in the 1960s.) Another factor was the surge in private capital flows in the 1990s, to which many countries in Asia and Latin America had access. A third factor was an increasing concern in the development community with problems regarding the effectiveness of aid in achieving its development goals.

These changes in two of aid’s three rationales raised questions about the relevance of traditional foreign aid to U.S. interests and values in the world. The changes also coincided with an altered political environment within the U.S. during the 1990s that involved three elements: uncertainty on the part of both the Bush and Clinton administrations as to the appropriate role of the United States in the post-cold war world, efforts on the part of both of these administrations to cut the federal budget deficit, and the election of a Republican-controlled Congress in 1994 that was highly critical of foreign aid. These changes at home and abroad led to a gradual shift in the purposes of U.S. aid, a sharp decrease and then a gradual increase in aid levels, and prolonged (but thus far unsuccessful) efforts by the State Department and later in Congress to force a reorganization in the foreign aid bureaucracy.

Development assistance has expanded beyond aiding poor countries in poverty reduction and economic growth to providing direct assistance to disadvantaged groups such as poor women and landmine victims.

championing democracy, including funding elections, training political parties, and strengthening legislatures and judiciaries.

fostering economic and political transitions in former communist countries.

Several shifts have taken place in the original purposes of U.S. foreign aid. The shifts include the metamorphosis of security into peacemaking—a process that, though little acknowledged, has been under way since the 1979 Israeli-Egyptian Camp David Accords. Development assistance has also gone through a metamorphosis. The post-World War II paradigm that development should create sustained growth and reduce poverty in poor countries has dissolved in recent years into several different approaches. The World Bank, regional development banks, and, to some extent, USAID continue to promote this traditional development notion by supporting infrastructure projects, expanding health and education services, and encouraging a variety of economic reforms. But now added to these traditional approaches are efforts to directly help disadvantaged sectors by funding child survival activities, poor women (including microenterprise lending), landmine victims, various kinds of community development, and so on. The primary motivation for this assistance is humanitarian, and the amounts of assistance are often too small to have a broad, national impact in recipient countries.

A third focus involves addressing major transnational problems, such as the spread of infectious diseases, environmental degradation, and the shortages of fresh water and other resources. Though not traditional development targets, these problems often occur in poor countries. Monies for this type of assistance are growing, judging from allocations for HIV/AIDS, global warming, coral reef protection, and TB, but this focus has not yet been recognized as a major rationale for foreign aid.

Humanitarian relief remains a major purpose for U.S. assistance. During the past ten years, however, Washington has expanded this category to cover post-conflict activities such as demobilizing, disarming, and reintegrating combatants; demining; and helping to reestablish functioning economies and political institutions by structuring post-conflict elections, supporting political organizations, and facilitating mediation between hostile ethnic communities. In addition, new issues have arisen that remain undecided: should relief, for instance, be denied to governments or refugee camps controlled by groups responsible for the conflict?

Using foreign aid to promote democracy is a policy that gained prominence during the 1990s. The big-ticket items include financing elections, training political parties, strengthening legislatures, encouraging judiciary reform, supporting an independent media, and building civil society organizations involved in human rights and democracy-related activities.

Expanded aid for economic and political transitions in Russia and the former Soviet bloc countries is also a phenomenon of the 1990s. This aid has been used to support civil society development; fund privatization in Russia, the Czech Republic, and elsewhere; help write commercial laws in Eastern Europe; strengthen Mongolia’s energy sector; reform criminal law and procedures in Russia; and encourage other economic and political reforms. Some early aid recipients, like Estonia and Poland, have “graduated” and no longer receive U.S. bilateral aid. Others, like the Ukraine and Romania, continue to receive significant amounts.

In recent years, the foreign aid budget has fluctuated. Total U.S. bilateral and multilateral economic aid peaked in 1991 (when aid to Eastern Europe began to rise), then declined until 1996 (under the newly elected Republican Congress), then increased significantly in 1998 and 1999, declined in 2000, and rose modestly in 2001. Most increases in foreign aid since 1997 have been for two purposes: peacemaking (in Kosovo and elsewhere) and humanitarian relief and recovery (especially after Hurricane Mitch in Central America.) These increases, often occurring in the final stages of negotiations in Congress on overall budgetary expenditures (and using the rubric of emergency spending programs to get around budget caps, reflect the government’s willingness to put money behind the purposes of peacemaking and humanitarian relief but not to significantly increase funding for traditional development purposes. Furthermore, the earmarks and directives in recent foreign aid legislation also reflect in concrete terms this shift in purposes, as Congress has consistently required each administration to increase aid allocations for humane concerns like fighting infectious diseases.

Finally, indications of the unsettled nature of U.S. bilateral aid arose in conflicts both within the Clinton administration and between the administration and Congress over the reorganization of U.S. foreign assistance. In 1994, the State Department proposed a merger with USAID, but Vice President Al Gore eventually nixed the scheme. Senator Jesse Helms and others in Congress took up the issue and attempted to legislate a merger, but they, too, failed, although the U.S. Information Agency and the Arms Control and Disarmament Agency were merged. At the end of the Clinton administration, some officials suggested that all relief programs, including the Office of Foreign Disaster Relief and the Refugee Program, should be combined and relocated within either the State Department, USAID, or a new, independent agency. These same issues are likely to be on the desk of the next president.

Toward a New Foreign Policy

Key Recommendations

Functions closely associated with U.S. diplomacy—peacemaking, addressing transnational issues, promoting democracy and transitions—should be located in the State Department.

Humane concerns and humanitarian responses to crises should be undertaken by a separate, flexible, bilateral aid agency.

The more traditional development programs should be moved from USAID to the multilateral development banks.

Aid has been and will continue to be used to promote certain U.S. interests in the world and to reflect U.S. values. This has been the case in the past, and it will continue to be so in the new century. The key question is: what do the changes in the world and the changes evident in U.S. foreign aid suggest as policy directions for the future?

The U.S. will continue to be a world leader. An important element—perhaps an increasingly important one—in that leadership will involve peacemaking. Foreign aid will continue to be extremely useful within a diplomacy of peacemaking. The next administration, however, must articulate a policy that will explain the extent and limits of U.S. engagement in peacemaking abroad.

A more inter-connected world imparts increasing importance to transnational problems. Aid will be essential for addressing such problems and encouraging other countries to do the same. Addressing humane concerns, an increasing focus already present in U.S. foreign assistance, should be made an explicit and central purpose of U.S. foreign aid. The more traditional development programs should be assigned to the multilateral development banks, which should be made accountable not only to their member governments but to the countries and people receiving loans. Funding should continue to be available to promote democracy and economic and political transitions, but the amount of monies for these purposes should diminish over time.

The organization of U.S. foreign aid should follow the purposes assigned to it. Those functions closely associated with U.S. diplomacy—peacemaking, addressing transnational issues, promoting democracy and transitions—should be located in the State Department in order to better manage both the policy and implementation of aid-funded activities. Those functions involving humane concerns and humanitarian responses to crises should be undertaken by a separate bilateral aid agency that is flexible and able to deal effectively with a variety of partners—for example, NGOs, foundations, private enterprises, central and local governments—in identifying, designing, and implementing activities abroad. Traditional development work should be concentrated in the multilateral development banks, which should have clear (and limited) purposes and be accountable to those they serve. International entities, such as the World Health Organization, should take greater leadership in addressing transnational issues, assuming they can also be reformed to function with effective leadership and staffs, especially as assistance to countries undergoing first elections (the big-ticket activities) declines.

It is past time for a fundamental rethinking of the purposes, organization, and implementation of U.S. foreign aid. The world has changed greatly in the last decade, and U.S. aid itself has begun to adapt to a new world. But ad hoc shifts in U.S aid policies are not enough to ensure that foreign aid programs make a contribution to the well-being of the U.S.—as well as to those receiving the aid abroad—and enjoy some measure of support from the U.S. public.